The U.S. dollar remains the pre-eminent international funding currency, even amid significant shifts in market structure, according to a new report by the Bank for International Settlements (BIS). The report stated that while US dollar funding is below its peak of a decade ago relative to the size of the global economy, the currency’s share of international funding has returned to the dominant position it held around the turn of the century.
“The widespread use of the U.S. dollar has benefited participants, but the resulting interconnectedness of the market can also create vulnerabilities,” the report said. The report also highlights how activity has declined in Europe but risen elsewhere, including in emerging market economies.
Marketable securities – which include bonds, medium-term notes and money market instruments – account for three-quarters of the increase in the nominal stock of US dollar funding in the past five years, and the role of non-banks in intermediation has grown.
These structural shifts have increased market complexity as well as the speed and scope of stress transmission throughout the global financial system. “In order to preserve the benefits from a global funding market based in US dollars we will need to make sure that the intermediation chain is robust,” said Philip Lowe, CGFS Chair and Governor of the Reserve Bank of Australia. “We have made progress with banks after the global financial crisis but we do not have enough transparency on the activity of non-banks,” he added.
The report points out where better data collection by the official sector, strengthened regulatory treatment of currency mismatches on non-bank intermediaries’ balance sheets, and more robust safety nets can improve the assessment and mitigation of risks associated with dollar funding.